Editorial: Losing steam

That’s the big lesson from the RBI surveys

It is a pity the central bank did not release the results of various expectations surveys before the bi-monthly credit policy on Tuesday. Had this been done, it would be that much more difficult for RBI to justify not cutting repo rates. A repo cut, it is true, alone cannot stimulate investment demand but, provided it is passed on by the banks, it gives a lot of relief to corporate borrowers and, at the margin, can stimulate consumption demand. While RBI’s reasons for not cutting rates are well-known, the surveys bring out just how weak the sentiment is across the board, and particularly worrying for the government should be the fact that RBI’s Business Expectations Index for the current quarter is at a mere 113.1—while that is lower than the last quarter’s 115.2, this is roughly the same level it was 3 years ago.

The most important finding, needless to say, is that relating to capacity utilisation. It is only when capacity utilisation levels are high that firms begin to start thinking of adding capacity. Capacity utilisation levels, using the RBI survey, were the highest in recent years in Q4FY15, at 83.2%. That is also the reason why investment levels—gross fixed capital formation—were the highest in FY12, at 38.2% of GDP. Not surprisingly, the investment planned in fixed capital is at its lowest in a few years—just 45.7% of respondents said they were planning investments in fixed capital in FY16 as compared to 49.1% in FY15 and 65.1% in FY14. Crisil points to the 5-year low in capacity utilisation being the main reason for capital formation being low and, in fact, is looking at an 8% fall in private investment this fiscal—within this, it is industrial sector capex that is expected to fall the most, by a whopping 16%. In terms of the expectations of future orders, 14.6% of respondents felt it would be below normal compared to 13.1% in the last survey round. The number of respondents expecting a fall in profit margin is higher, despite a greater number expecting a fall in raw material prices, primarily because more people are looking at a fall in selling prices.

In such a situation, it is important the government increase spending, and especially on capital expenditure. Capital expenditure is projected to rise by over 25% in FY16, but that is exaggerated by the fact that this was virtually stagnant in FY15—in comparison with FY14, capital expenditures rose just 2.5%. Indeed, in overall terms, it is worth keeping in mind that government investment is just around 4% of GDP as compared to the overall investment level of around 30% of GDP. Getting PSUs to invest more is another option that is being talked of, but this too will help only up to a point—total public sector investment, including that of PSUs, is around 7.5-8% of GDP. Between FY12 and FY14—data based on the new series is available only for these years—while government investment rose marginally from 7.4% to 7.8% of GDP and corporate investment was steady at around 11.5%, it was household investment that collapsed from 15% to 10.6% of GDP. Getting that back on track is the real challenge.